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Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

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Author Info

  • Fuest, Clemens

    ()
    (ZEW Mannheim)

  • Peichl, Andreas

    ()
    (ZEW Mannheim)

  • Siegloch, Sebastian

    ()
    (University of Mannheim)

Abstract

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7390.

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Length: 45 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7390

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Keywords: business tax; wage incidence; administrative data; local taxation;

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References

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  1. Wiji Arulampalam & Michael P Devereux & Giorgia Maffini, 2009. "The Direct Incidence of Corporate Income Tax on Wages," Working Papers, Oxford University Centre for Business Taxation 0917, Oxford University Centre for Business Taxation.
  2. Nadja Dwenger & Pia Rattenhuber & Viktor Steiner, 2011. "Sharing the burden: Empirical evidence on corporate tax incidence," Working Papers, Max Planck Institute for Tax Law and Public Finance sharing_the_burden, Max Planck Institute for Tax Law and Public Finance.
  3. Liu, Li & Altshuler, Rosanne, 2013. "Measuring The Burden Of The Corporate Income Tax Under Imperfect Competition," National Tax Journal, National Tax Association, vol. 66(1), pages 215-37, March.
  4. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 1-40 National Bureau of Economic Research, Inc.
  5. Thomas K. Bauer & Tanja Kasten & Lars-H. R. Siemers, 2012. "Business taxation and wages: evidence from individual panel data," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 153-12, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  6. R. Alison Felix, 2007. "Passing the burden: corporate tax incidence in open economies," Regional Research Working Paper, Federal Reserve Bank of Kansas City RRWP 07-01, Federal Reserve Bank of Kansas City.
  7. Holger Alda & Stefan Bender & Hermann Gartner, 2005. "European Data Watch: The linked employer-employee dataset created from the IAB establishment panel and the process-produced data of the IAB (LIAB)," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 125(2), pages 327-336.
  8. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 215.
  9. Janeba, Eckhard & Osterloh, Steffen, 2013. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers 12-005 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Barth, Erling & Zweimuller, Josef, 1995. " Relative Wages under Decentralized and Corporatist Bargaining Systems," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 97(3), pages 369-84, September.
  11. Alison Felix & James R. Hines, Jr., 2009. "Corporate taxes and union wages in the United States," Regional Research Working Paper, Federal Reserve Bank of Kansas City RRWP 09-02, Federal Reserve Bank of Kansas City.
  12. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2012. "Wages and International Tax Competition," CESifo Working Paper Series 3867, CESifo Group Munich.
  13. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, American Economic Association, vol. 61(3), pages 261-78, June.
  14. Gartner, Hermann, 2005. "The imputation of wages above the contribution limit with the German IAB employment sample," FDZ Methodenreport, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany] 200502_en, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  15. Bradford, David F., 1978. "Factor prices may be constant but factor returns are not," Economics Letters, Elsevier, Elsevier, vol. 1(3), pages 199-203.
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Cited by:
  1. Asatryan, Zareh & Baskaran, Thushyanthan & Heinemann, Friedrich, 2014. "The effect of direct democracy on the level and structure of local taxes," ZEW Discussion Papers 14-003, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).
  3. Sara Torregrosa Hetland, 2014. "A fiscal revolution? Progressivity in the Spanish tax system, 1960-1990," Working Papers 2014/8, Institut d'Economia de Barcelona (IEB).
  4. Juan Carlos Suárez Serrato & Owen Zidar, 2014. "Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms," NBER Working Papers 20289, National Bureau of Economic Research, Inc.

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  1. European Public Finance (ECON-O-403)

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